OPEC meeting most crucial in years amid production cut debate

Bianca Hartge-Hazelman

This month's meeting of the Organisation of the Petroleum Exporting Countries (OPEC) on oil production could well be its most important in years, but speculation is growing that the biggest members won't agree on how to curb surplus global output and revive oil prices.

The price of Brent crude is trading at $US80.18 a barrel, its lowest price since May 2009 and West Texas Intermediate is trading at $US76.97, its lowest since October 2009.

The price of oil has fallen consistently over the past few years as global supply increases. Photo: Bloomberg

With the price of Brent and WTI down 17 per cent and 25 per cent this year, respectively, OPEC members are expected to debate the need for an informal output cut of around 500,000 barrels per day when the group meets on in Vienna on November 27, according to Reuters.

The price of oil has fallen consistently over the past few years as global supply increases. In addition to tensions in the Middle East, US oil production has seen remarkable growth as America undergoes an energy revolution. US oil production growth has risen by nearly 60 per cent since the first Libyan disruption in 2011 and is now seen as a critical geopolitical factor in oil markets.

But any agreement is likely to be hard to reach at the OPEC meeting amid rumblings of an oil price war as member countries try to hold onto market share.

Remote possibility

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"All in all, a November 27 OPEC cut looks like a remote possibility, but the market might be setting the stage for a better opportunity to cut after winter 2015," said Citi analyst Edward Morse in a note to clients.

Ali al-Naimi, the oil minister of Saudi Arabia, which is the world's largest exporter, dismissed talk of a price war on Wednesday and reaffirmed a commitment to work with other producers to find price stability.

"Talk of a price war is a sign of misunderstanding, deliberate or otherwise, and has no basis in reality," Naimi told an event in the Mexican Pacific resort of Acapulco.

Mr Morse said despite Saudi Arabia's recent decrease in oil output, the Kingdom might agree to a cut output but only if other members play ball.

"It appears that the Saudis would like to see a concrete willingness on the part of other producers to participate in a production cut before agreeing to one. The trip to Mexico might also be a signal that the Saudis might be requesting participation from Mexico and other non-OPEC members if it is to slice a meaningful quantity of oil from markets," said Mr Morse.

Kingdom will not cut output

"The Saudis' assertive pricing suggests two lessons learned from the past: the Kingdom will not cut output on its own if it fears a loss of market share. And it can only deal with the "free rider" problem if other producers feel sufficient pain from lower prices that they will contribute to a production cut to reverse a price slide."

Mr Morse added in his note that there are also several other reasons why OPEC members are unlikely to agree to cut output including ongoing disputes between all Arab states in the Persian Gulf, excluding Iraq over market share and region issues.

The global glut is driven by light sweet crude oil coming from the US energy revolution, and US oil production growth is resilient even at lower prices. Shale growth should not be significantly impacted with WTI prices above $US75 a barrel.

There is also the view that not enough pain has been spread among OPEC countries.

"At Brent prices in the low $US80s, Algeria, Bahrain, Iran, Iraq, Libya, Oman, Venezuela, Yemen, Russia and likely even the Saudis cannot balance their budgets, although like the other GCC countries, Saudi Arabia has plenty of cash to enable it to endure low prices for some time. The ability of these countries to wait out a price war by cutting expenditures or drawing on reserves varies greatly, but those with restive, unemployed populations accustomed to costly social benefits will likely feel particularly acute pressures," said Mr Morse.